Flipping Houses in Canada Can Be Very Profitable If You Follow These Steps...

Flipping houses refers to buying a house and then selling it shortly afterwards, ideally for a profit.

You buy a house that's cheap (below market value) because it needs work and you put in the time and work needed to bring it up to standard and then sell it.

OR

You buy a house below market value that doesn't need work but the sellers are motivated to get out quickly, so you can swoop in and pick it up for a deal.

There's money to be made here, lots of it.

And TV shows have done a good job glamourizing that potential.

To be clear, there is money to be made in flipping, but flipping houses isn't investing.

We don't look at buying a property and renovating it for a "quick sale" as investing. To us, it's an active business and should be treated as one.

The time and energy involved aligns much more with that of a general contractor, or even developer, depending on the size of the project.

It's also very rare to see anyone who has done a few of these projects to have systems in place they can follow since each is unique and requires different attention and work.

However, it can be profitable, and there isn't just one way to make money in such a business of flipping houses.

If you're considering such a project, here are a few different takes on it that may impact the way you proceed...

I remember when a good friend told me he was going to start flipping houses for a profit in Canada.

I laughed … really hard.

Flashback of our own experiences started flashing in front of me.

You see, Nick, flipped his first home when he was 21 years old.

He spent months on this little 2-bedroom property in Mississauga near Cawthra Road and Lakeshore Road behind Cawthra Park High School.

If memory serves me properly, this property needed basement foundation repairs, a full kitchen renovation, a new basement interior, two new bathrooms, new floors and landscaping.

He worked on this thing day and night and finally sold the property … and he did make a profit.

The cheque from the lawyer on closing was for approximately $31,000.

Not bad right?  Especially for a 21-year old on his first adventure of flipping property for profit in Canada.

Here’s the reality of it…

After he paid for all his expenses, he was left with about $3,000 in net profit!  Not bad for flipping houses eh? 🙂

We figured that if he had just gone to work at McDonald’s during those months, he likely would have made more money!

3 Lessons learned

1. Never buy a 2-bedroom house, they’re too difficult to sell even if you add a 3rd bedroom in the basement.

2. Always expect the unexpected.  He had to invest a lot more in basement renovations than he planned for because the first contractor he hired completely misquoted the job.

3. You’ll always work harder and stress out more than you initially thought.

The good news was that both of us learned a ton through this process.

And we’ve both gone on to do other flips and invest in other properties.

The lessons from this experience have ended up being worth much more than that $3,000 in profit.

It taught us what to buy, when to buy, how to best sell, how to deal with Realtors, what upgrades are important and which aren’t necessary.

It was a very valuable learning experience.

Common Mistakes When Flipping Houses

When people start flipping houses, there are a few things which are often overlooked:

The Actual Cost of Repairs

These are commonly underestimated. If you haven't done renovations in a while be sure to update yourself with the current costs for the work or you may be in for a big surprise. This was a big reason Nick didn't make nearly as large of a profit on his first flip. He hadn't budgeted for the level of work that needed to go into the basement foundation. It was a costly oversight and a common one for anyone new to the field. In the early stages, it is better to work with someone with experience, so you can better plan and budget for the cost of repairs when flipping houses.

Quality of Materials

Are you planning on selling the home for top dollar once you're done but are using low-end materials for the job? You may be in for a surprise. Use the appropriate quality of finishes for the price point you're looking for and budget them accordingly to avoid cost overruns.

You don't want to cheap out on material, but you also don't want to be extravagant and update the home past the point of where you'll see a return. If you're flipping starter houses, you don't need to go top of the line, but it should be nice, good quality, and comparable to the finishes in the same category of home in that area.

Buying, Selling, and Holding Costs

Be realistic with the time and money you will need to own the property and finish the planned updates, include some time for the sale and for the future owners to take possession after you have an agreement in place. This can cut into profit quickly if you aren't careful. Keep in mind the costs associated with the purchase and sale as well.

When flipping houses for the first time, these are the most common things we see investors miscalculate. And since many start with lower-priced properties, there isn't much margin for error.

For example, if you're buying a home for $375,000 and you think it could sell for $450,000 after you're done, it sounds like you're getting a great deal.

But that $75,000 can disappear quickly.

We spent almost $10,000 on a simple bathroom at a rental property last year, and we didn't overpay.

If you renovated a couple of bathrooms with decent furnishings, give the kitchen a bit of a facelift, add some fresh paint, flooring and landscaping, plus transaction and carrying costs, there may not be much profit left. That's without doing too much work.

So what seemed like a great buy may not be as good as you thought with accurate costs calculated.

If you're going to undertake such a project, be prudent with your calculations ahead of time to minimize surprises down the road.

Once you've completed the project, you will be selling the property for market value at the time, which has a lot to do with the emotional appeal you can create.

It introduces some risk to the equation as market swings can occur and change your bottom line. This risk grows or shrinks with the length of time you take to turn the property over. The market can change quickly, so there are a lot more unknowns around the market if you're looking at a 6-month project compared to a 6-week reno.

There is not much driving the price other than market forces and the emotional appeal of the home.

On that note, you should know that you can sometimes break the limits other people will put on you.

A member of the Rock Star team has proven this time and time again as he's updated and sold dozens of properties.

He was continuously told that his asking prices were too high by realtors in the area, but with extreme attention to detail and putting a focus on uniqueness and lifestyle, he proved the naysayers wrong.

However, there is a lot of thought and effort put into exceeding typical 'market' prices, so if you plan on this approach, you must take care of every fine detail to truly make the home a destination.

When flipping houses for profit in Canada you should keep these specifics in mind:

First, you need to have a contractor you can trust, and regardless of their experience and track record, you’ll ultimately need to be the project manager if you want things to work on your timelines.

Second, you always want access to money.  A good friend of ours did a multi-million dollar flip recently, and the construction loan wasn’t enough to complete the job, but he had access to “private money” where he could borrow what he needed really quickly.  Make sure you have access to more money than you need or you can easily become the “motivated seller” you were initially looking for.

Third, to sell for the maximum amount in the least amount of time you want to understand “market absorption metrics”.  These are data points that Realtors have access to that will allow you to examine the state of the market and make predictions on where prices are headed.

Market Absorption Metrics

Understanding market absorption metrics has been critical to our own success, and we hold classes in our offices teaching clients how to do this.  It’s like having the ability to peak into the future.

Next, we’ve found that people pay more money for a property when you sell a “lifestyle” instead of 3-bedrooms and 2-full bathrooms.

For example, adding in a “steam option” to the shower is a huge plus.  Creating a “fitness centre” instead of a typical “gym” in the home is a huge plus.  This may mean connecting a bathroom with a steam room to the gym and having a dry sauna as well.

Or it may mean creating a killer media centre in the basement for movies and entertaining.

A friend of ours always includes a multi-level theatre in his houses … even if it’s a small townhome … and will stick a little snack bar with a popcorn machine at the back.

The reaction from buyers is always positive.

So, when flipping houses for a profit in Canada keeping “lifestyle design” in mind has been very valuable to us.

Lastly, you want to buy your property in a neighbourhood that can support higher prices.  Too many people buy properties and renovate them in areas that will have difficulty in supporting the premium price they’re trying to sell at.

It’s a critical mistake.

So, although flipping houses for a profit in Canada isn’t easy, it’s definitely possible.

Three ways to approach a flip

Buy Old, Make New, Sell For Market Value

This is the most common approach and one that is glorified on countless TV shows.

You find an older home (most often), that is outdated or poorly maintained, buy it for substantially less than a similar one in great condition would sell for, renovate, and sell.

We've made income from this approach in the past, as have others we know, but we also know people who have lost money on their flipping houses projects using this strategy.

Buy Old, Remove, Replace, Sell For Market Value

In theory, this approach is not much different than the first approach, just on a larger scale of flipping houses.

Instead of being a renovator, you would be a developer.

The reward can be higher, but there is substantially more work involved and the hurdles that come up will be much larger as well.

Things like permits, bylaws, and construction financing, all come into play at a much different level.

Anyone who has renovated an old house knows there are always some surprises, compared to building new, renos are a walk in the park.

But that's why there is opportunity with this approach.

The profit potential in most things is directly related to the amount of problems you're willing to deal with.

When renovating a property, most mistakes can be overcome quickly. In this scenario, they can lead to a lot of trouble, so surrounding yourself with an experienced team is vital.

Finding the right people to work with will be your key to success here, especially if it is your first time building a home.

Buy Old, Make New or Rebuild, Sell On Income

This is a strategy overlooked far too often.

The process of buying and renovating or rebuilding is similar, but the difference is you can sell the property as an income property (or keep it as your own cash machine).

Selling the property based on income gives you a much more reliable idea of the price someone would pay for the property once it's complete.

This removes a lot of the uncertainty around market fluctuations because you can gauge the rate of return an investor would get at different purchase prices, and there are always people looking for a good return on their investment.

For example, if you were selling a property and it had a 20% cash-on-cash return, there would be a lineup of investors interested. At 10%, demand would be less but still strong.

This means, with more certainty, you can start your calculations with the sale price and work backwards.

Essentially, you're taking the emotions out of the perceived value of the property.

Two strategies with the largest upside are:

• To either buy a mismanaged rental, upgrade it, and increase rents, which in turn forces appreciation because the income that the property produces has gone up.
• Or to buy a property that has a lower value use and convert it. Some of our most profitable investments have been buying single-family homes near universities and then turning them to student properties.

We were able to force appreciation by having the property produce income and refinance it after the work was done to pull out our money while it still created strong cash flow.

Weeks after Nick's first flip, a friend of his at a men's league hockey heard about it and mentioned he found a good property to "flip" by McMaster University in Hamilton.

They bought it shortly afterwards, fixed it up, refinanced it, pulled out all their down payment, and they still own that property today. It's been spitting out cash flow ever since. It doesn't have to be a student property, converting properties into a duplex or triplex, or just adding an in-law suite can have similar results.

This is becoming a popular approach among many of the members we work with. We even offer classes on this approach as part of our membership.

So if you're looking at flipping houses, there are a few strategies to consider and details to be conscious of for all.

For anyone who has done it in the past, it is obvious that this strategy is much more of an active business than a passive investment.

But we all need income to use for other things.

The most successful people we've seen flip properties using any of these strategies use the short-term income to invest in long-term assets.

One makes money; the other creates wealth.

It can be a nice way to have your cake and eat it too!

Instead of Flipping Houses…

A lot of people looking to make money from real estate look for motivated sellers, where they can buy the home for cheap, and quickly flip it.

Instead, why not find nice homes, in nice areas? Why not begin creating an asset base that works for you?

What if, instead of selling the assets (homes) you've purchased, you held on to them? Isn't that what some of the best investors do? Buy assets and hold them with no foreseeable intention of selling?

Think about it. Isn't the point of getting into real estate investing to create wealth for yourself?

Are you looking for another job, or are you looking to start making your money work for you?

The reason it's difficult to 'flip' properties is there isn't a system for you to follow. When you're in the business full time you'll have people call you up, deals will show up as your name becomes better known. But when you're trying to flip properties in your spare time, it can be challenging to continue finding good properties to flip for a profit regularly.

You may make a profit from one project, but then it could be months before you've found another home worth flipping, and then you have to go through the time and work of another project before you see the money. There's no continuous, reliable source of income.

Finding nice homes in nice areas is a little easier, right?

You're not forced to look for and compete for "deals."

Nice homes draw nice people to them. Your property will attract a good group of individuals wanting to rent your home. And there are some real upsides to owning and renting the home to nice people compared to simply selling your home to a nice person.

Monthly positive cash flow is one of those big upsides.

Wouldn't it be fantastic to start receiving regular cash flow from your investment right away?

This is completely possible. With the right strategy and approach, you can buy a good home in a desirable area, and rent it out to good tenants. One of the strategies we use even gets thousands of dollars from the tenant, before they even move into your home. That's on top of the regular monthly cash flow.

Plus, when it comes to tax time, there are tax deductions for landlords. As you own the home, you're building equity (thanks to the tenant paying off your mortgage), and appreciation.

Doesn't this sound more like investing?

Putting money into something that regularly produces wealth.

The best part is that there's already a system you can follow. You're not stuck trying to figure out how to do this.

So, stop spending countless hours searching for "deals" and motivated sellers. Go out and switch your search to nice homes in good areas, and start collecting cash flow from them.

If you're interested in learning more about investing in nice homes in nice areas, we offer a free class in our office to the public about this exact investing strategy. You can find out more about the class and register today at rockstarinnercircle.com/free-training.